BOND REPORT: Treasury Yields Extend Climb Ahead Of Final Fed Decision Of 2017
December 13 2017 - 8:40AM
Dow Jones News
By Mark DeCambre, MarketWatch
Federal Reserve is expected to raise rates for third time this
year
Treasury yields rose on Wednesday ahead of a key decision of the
Federal Reserve that is anticipated to result in the third
interest-rate increase of 2017. Investors in government paper are
expected to focus on the central bank's inflation outlook and its
assessment of the health of the U.S. economy, both of which will
factor in the pace of policy normalization in 2018.
What are Treasury yields doing?
The yield on the 10-year Treasury note was at 2.420%, compared
with 2.403% late Tuesday in New York. The 2-year note yield , the
most sensitive to interest-rate policy, was at 1.848%, versus
1.829% in the previous session, while the yield of the 30-year bond
was at 2.791%, compared with 2.782% on Tuesday.
Bond prices and yields move inversely.
What's driving the bond market?
Wall Street is anticipating that the Fed's policy-setting
Federal Open Market Committee will raise short-term interest rates
by a quarter percentage point to a range of 1.25% and 1.5% , the
fifth such increase since the Janet Yellen's central bank began
raising rates from near zero at the end of 2015. An updated policy
statement, and Fed members' projections for future interest rates,
known as the dot plot, will be released at 2 p.m. Eastern Time.
Yellen is scheduled to field questions from reporters a half-hour
later in her final news conference before she retires and is
replaced by Fed. Gov. Jerome Powell.
Investors will be eager to hear the Fed's expectations for
economic growth, especially in light of House and Senate
lawmakers's efforts to pass a potentially business-boosting tax
policy. Stubbornly low inflation, running below the Fed's annual 2%
target, has been a focus for bond investors because rising
inflation can diminish the future value of fixed-income assets.
Muted inflation levels have held long-dated bond yields, the
most attuned to shifts in the inflation outlook, in check
throughout the year.
Subdued levels of rising prices, wages and inflation have
encouraged the central bank to move cautiously in lifting
short-term rates for fear of upending economic recovery.
However, there are signs that inflation may be perking up
somewhat, with Yellen & Co. attempting to balance increasing
interest rates from crisis-era levels against the backdrop of
sluggish moves in prices. Annual inflation was above the Fed's
target in February but was just 1.6% in October by the Fed's
preferred measure of inflation, personal-consumption
expenditures.
The market is pricing in about three rate increases in 2018, but
more could be in the cards if the economy and inflation are viewed
as likely in an uptrend.
What are market participants saying?
"As we highlighted recently, we expect the FOMC to be rather
neutral for U.S. yields. A hike in December is a done deal and we
do not expect changes in the 'dots'," wrote UniCredit in a
Wednesday research note
(https://www.research.unicredit.eu/DocsKey/economics_docs_2017_162946.ashx?M=D&R=54890432)
whose authors include strategist Kathrin Goretzki and economist
Chiara Silvestre.
"We see higher rates in 2018. First, we think macro risks are
more symmetric than priced. Second, we think the market is
underestimating the cumulative effect of marginal changes by a
growing number of central banks..." wrote rates strategist Ralf
Preusser and Shyam Rajan at Bank of America Merrill Lynch in a
Wednesday note. They said they expect the Fed, the European Central
Bank, Bank of Japan, Bank of Canada, and authors to join in a
policy-tightening trend.
What data are in focus?
Additional Inflation data for November are scheduled for release
at 8:30 a.m. Eastern. Economists polled by MarketWatch expect a
0.4% rise for a consumer-price index.
What else is on investors' radar?
Both the Bank of England and the European Central Bank meet on
Thursday. U.K. inflation rose at an annual rate of 3.1% in
November, providing some support to the notion that puzzling
inflation may beginning to normalize.
Indeed, on Tuesday, a U.S. reading of wholesale prices rose 0.4%
in November, pulling the inflation gauge up 3.1% over the past 12
months.
What are other assets doing?
The German 10-year government bond yield was at 0.324%, compared
with 0.297% on Tuesday, while the U.K. 10-year bond yield was at
1.233%, versus 1.205% in the prior session.
(END) Dow Jones Newswires
December 13, 2017 08:25 ET (13:25 GMT)
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